Contract Management: Ensuring Effective Supplier Performance

³ Background

Frequent instances occur within contracts where disputes arise with respect to the quality of the materials or service performance. Invariably the relationship between the owner and the contractor deteriorates with the result being that the owner will not receive full value for money.

Execution of a contract does not give license to the owner to demand services that were not contracted, or for the supplier to supply inferior product or provide unsatisfactory service. Thus, it is essential that the RFP includes language that will facilitate management of the contract, the terms and performance metrics which are usually developed collaboratively between the owner and the successful proponent prior to execution of the contract.

To maintain a successful relationship, the key ingredient is for the two parties to set scheduled milestone meetings to review the performance to date with the purpose to identify any deficiencies and strive for mutual improvement. This implies that all parties can contribute to ongoing improvements.

Why are supplier evaluations important?

One of the weaknesses in contract management is where the owner does not have a structured process to identify the performance deficiencies in a timely manner. In the absence of a formal supplier evaluation process, the ability to measure value for money is forgone. If suppliers know their performance will be assessed, they tend to make a stronger commitment to meet expectations.

Supplier performance evaluations should be a shared responsibility between the end user and the procurement or designated contract staff. Verbal complaints or undocumented perceptions about poor performing suppliers won’t cut it and are not defensible when trying to avoid an award to a poor performing contractor. An evidence-based evaluation model indicates where poor performing suppliers can improve and good performing suppliers can be recognized as a matter of record which assists them in future contracting opportunities.

The lack of a formal evaluation process and a subsequent record on file, defaults in favour of the poor performer. The situation continues until such time as this service provider hits an unacceptable level or complete failure and remedial actions are necessary. Unfortunately this adds to the administration costs and does not address the core problems. Replicating successful contracting processes is an objective which leads to the adoption of best practices in contract management.

Supplier Evaluations

Supplier evaluations on contracts are related to the expected level of services as stated in the RFP or as set out in the contract, and the perceived level of services received by the organization during the performance of the contract. The perceived level of services equates to the actual assessment of the services after they have been performed. The expected level of services equates to the pre-contract evaluation and any subsequent meetings to clarify the services. The latter is analogous to the hiring of a prospective employee. The employee’s resume and references give the employer an expected level of competency and then the perceived value of that performance is assessed periodically through job performance evaluations.

The comparison between expected and perceived services can be summarized as follows ⁴:

• Where Expected Services > Perceived services = Unsatisfactory evaluation
• Where Expected Services = Perceived services = Satisfactory evaluation
• Where Perceived Services > Expected services = High level of satisfaction

The reason for the discrepancies between the expected and the perceived level of services should be determined as a part of the continuous improvement process. Where a perceived service exceeds the expected level of service, this too is an important learning lesson resulting from a supplier evaluation. It is the relationship between the expected (desired) level of services and the perception of the actual services received which is what needs to be assessed in the supplier performance evaluation.

Not all evaluations should be conducted in the same manner; one size does not fit all. Based on the type of contract, the performance evaluations should address the nature of the goods or service and the inherent risks.

Types of Contracts

• One-time services i.e. need to have a document translated;
• Multi-year delivery of services i.e. need to have painting contractors available to meet ongoing service requests;
• Multi-year outsourcing of services i.e. need to have IT support available to manage technology upgrades
• Short-term project services i.e. need to have facilitation of training programs
• One-time goods acquisition i.e. need to buy an electron microscope
• Multi-year goods delivery i.e. need for office supplies and related equipment on an ongoing basis
• Capital projects i.e. construction, infrastructure investments and upgrades i.e. often complex technologies or critical time lines for completion

Each type of contract implies different sets of criteria and outcome measurements and therefore different contract management tools or areas of focus. All contracts share the common component of the perceived level of satisfaction to be assessed at the end of the contract.

Although there are differences in the types of contracts, there are common best practices for managing contracts. Nevertheless, this does not presuppose every evaluation should encompass the same degree of detail. Rather, evaluations will differ given the variety of factors impacting procurement such as the circumstances under which the goods or services were acquired. This could include time frame, emergent situation, compatibility risks, project cost, or availability of alternatives in the market.

Service contracts may result from a successful competitive process or where justified, a direct award. One-time, short term contracts tend to be less problematic from a managerial perspective than multi-year agreements. However, all contracts require management of the terms and conditions specific to the nature of the goods or services to be provided, or unique to departmental requirements which the parties must comply with during the term of the contract.

Key responsibilities in successful contract management:

• Compliance with the contract terms and conditions by all parties
• Satisfactory performance by the contractor during the term of the contract
• Value for money was received by the owner
• A post-contract evaluation summary was conducted and stays in the file

The performance of the contractor during the term of the contract should be monitored for:

• Identification of any problems or deficiencies as per the Statement Of Work
• Remedial actions taken where necessary
• Interpersonal skills and relationships of contractor resources
• Failure to meet terms and conditions

Contractors should be advised during the contract as to how their performance is meeting expectations and not only after the fact. After the completion of the contract, an evaluation should be conducted as to how the contractor performed in meeting the expected outcomes and their relations with organization staff during the performance of their services.

Post-contract evaluations and reviews are conducted to:

• Ensure the goods or services were provided as per the contract terms and conditions
• Ensure the end user needs were met
• Identify areas of improvement in procurement
• Assess whether the contractor would be considered again for similar services in the future

The contract manager should follow up directly with end users and/or the RFP team lead to discuss the contract/project file, and engage with the supplier to identify areas for improvement. The post-contract evaluations are a commitment to continuous improvement which is a best practice. The performance evaluation forms a part of the contract file for future reference.

The learning outcomes derived from the evaluations provide an iterative process which contributes to the benefits of the owner and the supplier.

Does a supplier performance evaluation have a Return on Investment?

As advocates of supplier performance evaluations we share the following advice, comments, and recommendations:

• A formal and comprehensive evaluation requires a wide variety of perspectives by affected stakeholders to be objective. The cost to conduct supplier evaluations during and post-contract is relatively low in comparison to the benefits being realized. (Many software programs enable online evaluations with automated results capturing quantifiable and subjective information, such as Survey Monkey, for less complex projects or contracts).

• Suppliers should have a clear understanding at the outset of the contract as to how their performance will be evaluated. By having established mutually agreed to performance metrics, it allows the parties to focus on what is important and how well they are meeting expectations.

• The results should be shared objectively with the specific supplier being evaluated. Where areas for improvement are noted, this can complement continuous quality strategies; and where a strong performance is assessed this too contributes to replicating this ongoing level of performance. Supplier improvements not only benefit one customer but have the added benefit of the multiplier effect where the resolutions can be applied to many customers. This is a great motivator for sales organizations.

Early detection and remediation of issues reduces the overall costs to all parties. This leads to improved performance and long-term competitiveness in the market. The parties have a stronger understanding of the expectations and commitments to the spirit and intent of the contract. The opportunity for leading suppliers to reference successful contracts with potential clients garners better evaluations in the future. The owner receives a quantifiable value for money with higher end user satisfaction. See ADDENDUM I

Supplier Reward Programs

Suppliers want to know their ranking determined through the performance evaluation metrics. The scores provide a percentage in relation to the overall points set out. Where a supplier’s perceived level of performance exceeds the expected level of performance, rewarding them with a “Preferred” or “Exceptional Supplier Status” certificate presented at an organizational event will provide a stronger motivation to maintain that ranking. This contributes to increased competition in the market to vie for this level of recognition.

The big payback to the owner is to be the ‘Customer of Choice”. In a recent provincial RFP the successful bidder immediately asked for a debriefing (debriefings are usually associated with unsuccessful bidders) since they knew that their proposal’s solutions were likely not ranked the highest in every category in the bid document. Therefore, prior to implementation, the supplier wanted to know where they could focus on improvement at the outset of the contract. This led to a strong working relationship between the parties where the eventual perceived levels of services were greater than the expected level of services.

ADDENDUM I

Vendor/Contractor Performance Rating Guidelines

Rating	Score	Definition
Exceptional	7	Exceeds many of the objectives as per the statement of work to the department’s benefit; work completed early or on time; where necessary, any corrective actions taken were effective; deliverables including technical performance exceeded expectations
Very Good	5	Meets the objectives as per the statement of work and exceeds some to the department’s benefit; work was completed on time; corrective actions taken were effective; deliverables including technical performance were within expectations
Satisfactory/Good	3	Meets the minimum requirements as per the statement of work; most of the work was completed on time; corrective actions taken required departmental input
Marginal	2	Failed to meet some of the requirements as per the statement of work; the current scope of work partially completed; and deliverables were partially met but full completion unlikely
Unsatisfactory	0	Does not meet most contractual obligations; full completion unlikely; corrective actions were ineffective; the current scope of work incomplete; corrective actions failed to resolve related issues or were not implemented; deliverables were not met
Not Applicable	N/A	Based on specific conditions or criteria

The above guidelines provide a subjective means of assessing the performance. A final score should be reached by consensus and or averaged by the number of staff completing an evaluation to mitigate bias. The post-contract evaluation process should include end users, procurement, legal, finance or accounting staff or other affected stakeholders to assess their perception at the completion of a project. This forms a part of the contract record and can be used when evaluating future proposals.